Investors say GDP bonds won't work
* Proposal to avert sovereign default flawed in practice
* Costs of recession insurance too high
* Reliance on credible data reporting poses problems
By John Geddie
LONDON, Feb 21 (IFR) - Investors say a proposed form of government debt that would let countries pay interest depending on their rate of economic growth, intended to avert potential default, will never work.
Some of the world's leading economists have united behind the concept of bonds linked to GDP, which they say could prevent painful debt restructurings like those in Argentina and Greece.
The Bank of England last month published a paper on GDP-linked bonds, joining Yale University and the International Monetary Fund, which have also pushed the idea in recent years.
"Return on these bonds varies in proportion to the country's GDP," the bank wrote.
"When growth is weak, the debt servicing cost and repayment amount automatically declines; and when growth is strong, the return on the bond increases." Continuación...